Future of Finance Fintech’S Brazil Moment

May 12, 2017 Future of Finance Fintech’s Brazil Moment

Equity Research Brazil’s overbranched banking system is ripe for disruption by new entrants

The global trend travels to Brazil Carlos G. Macedo “Fintechs,” or companies that leverage technology to provide financial (212) 902-7211 [email protected] services, are starting to emerge in Brazil, bringing with them the potential to Goldman Sachs and Co. LLC disrupt the country’s branch-dependent market. In this report, we survey the ecosystem and size the opportunity for new entrants, while also exploring Marcelo Cintra the likely response and implications for incumbents. +55(11)3371-0833 [email protected] Goldman Sachs do Brasil CTVM S.A. Why is Brazil different from other markets? Steven Goncalves While fintech disruption has proven a common trend in many countries, we (212) 902-4175 [email protected] believe the Brazilian financial system is particularly susceptible. The banking Goldman Sachs and Co. LLC market is concentrated relative to global standards, and penetration, by most metrics, lags developed peers especially in lower income classes. Nelson Catala (801) 884-4957 [email protected] Prices for financial services and spreads for loans are also among the Goldman Sachs and Co. LLC highest in the world. We believe this unique market structure positions fintechs to have a larger impact in Brazil than in other developed markets.

Why are fintechs becoming more relevant now? Several trends are converging that are likely to boost fintechs’ relevance. Recent mergers have concentrated the financial system further, increasing the appeal for new entrants. Smartphones and internet access—key delivery mechanisms for fintech—are also increasing rapidly as Brazil’s tech-savvy generation comes of age. We see fintechs taking an increasing share of Future of Finance series mind against this backdrop, even if their share of wallet starts out small. This report is the latest in our 200+ fintechs with a potential revenue pool of R$75 billion series exploring the technology, We identify a potential revenue pool of R$75 billion over 10 years for the regulation and new business more than 200 fintechs currently operating in Brazil. We examine several models changing the shape of models for fintech services, with a special focus on credit card company finance, and the implications for NuBank and an interview with digital bank Banco Original. We also take a consumers and the industry. See high-level look at increased venture capital activity in the space. inside for more.

Incumbents to respond with IT investment, efficiency gains We expect large Brazilian banks to respond to fintechs in part by copying the disruptive products but more so by increasing IT investment for greater operational efficiency. While incumbents are still likely to lose share to fintechs long-term, we see benefits to this investment. We believe they can improve ROE 300-600 bp by shifting 50% of their clients to digital platforms.

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. May 12, 2017 Brazil: Financial Services

Contents

PM Summary: The emergence of the Brazilian fintechs… and what it means to banks and other financials 3 Why will the path in Brazil be different? Market concentration is high, penetration is limited, pricing is expensive 8 Concentration of the financial services market: Creating opportunities as barriers to entry are overcome 8 Penetration: Mixed, but with much room for improvement 10 Pricing: Expensive products, more expensive loan rates 12 Why will fintechs make a difference now? Convergence of concentration, technology and economic cycle 15 Market concentration: Increasing as mergers come through 15 Technology creating opportunity: Smartphones and internet access feeding demographics 16 Economic recovery: Emerging from a deep dive 18 Interview with Banco Original 21 Canvassing fintechs: 200 strong and growing 22 NuBank: Becoming a force in credit cards 25 What will happen to banks? Moving from bricks to clicks 26 Copycat: Mimicking fintech solutions 26 Breaking the traditional model: Drive to virtual banking 27 Interview with Itaú Unibanco 29 Our view of the outcome: A more efficient – and more diverse – financial sector 30 Risks: Regulation, reaction, growth 32 Appendix: Fintech sector breakdown 34 Banking services 34 Payments 35 Personal finance management 36 Lending 37 Investments, savings, wealth management, trading 38 Insurance 39 Venture Capital Horizons Inside: Brazil fintech 40 Rating, pricing and price target information 42 Disclosure Appendix 43

The prices in the body of this report are based on the market close of May 11, 2017.

Note: Third party brands used in this document are the property of their respective owners, and are used here for informational purposes only. The use of such brands should not be viewed as an endorsement, affiliation or sponsorship by or for Goldman Sachs or any of its products/services.

Technology, regulation and new business models are changing the shape of finance. From shadow banks to new tech platforms, an evolving class of competitors is emerging to go after the profit pools of traditional lenders and institutions. In a series of reports on the Future of Finance, we explore what these trends mean for how companies and consumers bank, lend, borrow and pay.

The Rise of the New Shadow Bank, March 3, 2015 Redefining the ‘Way We Pay’ in the Next Decade, March 10, 2015 The Socialization of Finance, March 13, 2015

Goldman Sachs Global Investment Research 2 May 12, 2017 Brazil: Financial Services

PM Summary: The emergence of the Brazilian fintechs… and what it means to banks and other financials

Much as in other countries around the world, fintechs (companies that leverage technology to provide financial services) are starting to emerge in Brazil. They are spurred by increasingly favorable conditions, which should make them progressively more relevant to investors focusing on the financial sector. In this report, we examine how this transition will take place, why it will be different from those in more developed markets, why we see now as a starting point and how incumbents will respond. We also canvass the segments in which we see most fintech activity. With time, we see fintechs capturing a relevant share of the financial services market, and being one of the main drivers of growth and penetration, as well as an agent to lower spreads and fees. Given the dynamics of the Brazilian market (concentration, penetration and pricing) we see this evolution happening differently from what has occurred in other markets, both developed and developing. In our view, the rise of fintechs is likely to spur incumbent banks to invest heavily in IT, reducing costs and improving efficiency. Even if in the short term fintechs are more likely to grab share of mind than share of wallet, we see their impact starting now.

Why is Brazil different? Market concentration, limited penetration and pricing The impact of disruption in any market depends, in large part, on the shape of that market. In Brazil, we see conditions in place for technology-driven disruption to have a larger impact than in some developed markets, such as:

 An oligopolistic market structure. The top five banks in Brazil (excluding the development banks) hold 84% of the total loans in the system. The Herfindahl- Hirschman market concentration index for Brazil is in the top half of the range when compared to markets in other countries. This concentration is particularly evident in branch banking, where the top five banks have 90% of the branches. With the traditional distribution of financial services being disrupted by new technologies, thus breaking down barriers to entry, large banks in Brazil would seem to be more vulnerable to new entrants than peers in other countries.

 Limited penetration, especially in low income. Penetration of banking services in Brazil is low compared to global standards, though relatively close to peers in the same region and at the same development level. Penetration is lower, even relative to peers, when considering the usage of online/mobile means to make financial transactions. We see barriers to penetration arising from culture, regulation and market structure, all of which could be overcome by penetration of technology and the aging/education of the population.

 Expensive pricing for loans, other financial services. Interest rates on loans in Brazil are among the highest in the world, and fees for services also are expensive by comparison to those charged by banks for similar services in similar countries. We believe the problem is one of limited information, which increases risk and reduces the incentives for new competition. We see new technology helping to make information more widely available for bank clients and potential entrants, ultimately driving pricing downwards.

Goldman Sachs Global Investment Research 3 Fintech Spotlights Inside

The e-banking startup The bankless lender The evolving incumbent Banco Original (p. 21) NuBank (p. 25) Itaú Unibanco (p. 29) Q&A, Guilherme Stocco Filho, Director of Company vignette Q&A, Livia Martines Chanes, Director of Digital Innovation Channels, User Experience & CRM analytics The model: Small traditional wholesale The model: The simple, free credit card The model: Leading bank in Brazil that has bank that migrated to a full-service virtual startup partnering with banks to expand invested heavily in IT to better serve its retail model in 2015. access to lending. It’s already gained a clients. reputation as a trustworthy and efficient Soon you will be provider—no small feat in Brazil. There is a strong “able to open a bank “change movement in account in the same our clients’ behavior, way that you open Our take: NuBank’s development followed which relates to the your Facebook a path that we believe may be replicated in fact that people are, account, and that other financial services segments— regardless of age, changes everything.” spurring incumbents to respond. more connected to the digital world.”

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 May 12, 2017 Brazil: Financial Services

Exhibit 1: Fintechs spread through various niches and industries; we identify a potential revenue pool of R$75 billion Breakdown of key fintech segments

Area Rationale Potential revenue Companies in Brazil Comparables in US pool in 10 years (R$ billion/yr)

Banking The Brazilian banking market is highly concentrated, Banco Original, Banco ING Direct services which increases costs and limits penetration. Neon, Zuum, Conta Regulation and technology are breaking down barriers Um, E-dinheiro to entry related to distribution, clearing the way for new entrants that could shrink asset and liability 50 spreads and increase penetration. Model would extend from full-service virtual banks to simple e- wallets.

Payments Despite Brazil being in one of the most developed Stone Pagamentos, Venmo, Square, markets in Latin America, the Brazilian payments PicPay, ValePresente, Braintree, Google system is concentrated and offers limited functionality Ta Pago, PagPop Wallet given older technology. New entrants leverage the 12 latest technology in acquiring, payment processing, and money transfers, with solutions both in the P2P and B2B spaces.

Personal Brazilians have historically had limited tools with GuiaBolso, Quero Credit Karma, Mint, finance which to manage personal finances, which has led to a Quitar, Konkero, Earn Up management greater usage of expensive loans and a poor allocation Organizze, Quanto of resources. Companies are using internet-based 6 Gastei, Poupa Certo, solutions to help users manage accounts and Meu Dinheiro, Ghaio renegotiate loans, as well as to provide market places Kitado, Acordo Certo for new loans and savings products.

Lending The average annual lending rate in Brazil is 32%, but NuBank, Geru, Nexoos, Lending Club, Sofi, can reach up to 15% per month for certain personal Credisphera, BKF Affirm, LendingTree, loans. Part of this is driven by the limited amount of Online Credible, Lendio, information borrowers and lenders have on each Fundera other, as well as shortcomings in distribution. 22 Companies are using internet and mobile-based platforms, along with innovative business models, to bridge the gap between savers and borrowers, both within and outside the financial system.

Investments, Saving money in Brazil, particularly for the lower Magnetis, Órama, Betterment, Wellfront, savings, income strata, has been left to retail banking products SmartBrain, Ellevest, Envestnet, wealth with low yields, a result of limitations in distribution Investeapp, Verios, Fundrise management, and information, as well as market concentration. SmarttBot, Warren, trading Through user-friendly online platforms, new 10 Easynvest, Yubb, companies are offering clients alternatives to invest in Renda Fixa, Meus equity and fixed income products, either directly or Ynvestimentos, indirectly through comparison tools that highlight controlAção advantages and disadvantages of each product.

Insurance The insurance sector in Brazil has modest penetration Bidu, Thinkseg PolicyGenius, Trov, as a result of high levels of real interest rates as well Cuvva, Everquote, as limited distribution. While new companies cannot Onsurance, Insurify, fight the problems created by high interest rates, they Esurance are seeking clients through smart, online distribution 25 platforms, and improving underwriting efficiency by using a combination of big data and traditional actuarial practices.

Source: Goldman Sachs Global Investment Research.

How will the banks respond? We expect the large Brazilian banks (Itaú Unibanco, Bradesco, Banco do Brasil and Santander Brasil) to respond to the changing environment created by fintechs and their disruption.

One response will be to mimic the solutions developed by fintechs. This can happen by copying products almost entirely, such as the Bradesco/Banco do Brasil Digio card, or by rolling out digital-based platforms, like Itaú Unibanco’s virtual bank. Banks can also replicate fintech marketplaces to their customers. Another response, which appears more cooperative, would be to bankroll fintechs by providing funding or hiring their services.

Goldman Sachs Global Investment Research 5 May 12, 2017 Brazil: Financial Services

Banks are already engaged in a second approach: Using IT to improve operations. Banks have historically invested heavily in technology, and the emergence of fintechs should accelerate investments further. By shifting clients onto a digital platform, banks can close down branches and reduce headcount. We estimate that by shifting 50% of clients to a digital platform, annual bank ROE would increase, all else equal, by 300 to 600 bp. Furthermore, better information provided by technology should allow for better scoring of risk, which should in turn improve loan underwriting standards. This should also increase the addressable market for financial services, ultimately increasing penetration.

We feature an interview with Ms. Livia Martines Chanes, Director of Digital Channels, User Experience and CRM Analytics at Itaú Unibanco, a bank we consider to be at the forefront of change for Brazilian banks.

Ultimately, we expect the market for financial services in Brazil to become more efficient and more diverse. As such, we expect the change to:

 Break down barriers to entry. New distribution channels, driven by mobile internet, should break down barriers to entry created by branches. This would allow for more intense competition between incumbent banks and new fintech entrants.

 Foster competition, lower spreads/prices. Increased competition should lead to pressure in pricing for both loans and services. Marketplaces for loans and savings products reduce the information gap between banks and clients, leading to more competitive pricing for banking products.

 Drive penetration. The combination of a more powerful distribution tool (mobile phones) with competitive pricing should help to improve penetration. Outsiders that were priced out of the market or excluded because of distribution would be able to find an entry point. New solutions for niche segments, made economically viable by cheaper distribution, would attract others.

 Change in client habits. Over time we expect the habits of bank clients, who are highly branch dependent on a relative basis despite quick adoption of mobile banking, to change. Confidence should increase and feed further growth, adding speed to the transformation.

As a result, in ten years we expect incumbent banks to lose market share, but more so because newcomers will grow at a faster pace than because of an increase in the overall size of the market. We also expect spreads/fees to tighten, but see banks offsetting this by becoming more efficient as a result of migrating to digital platforms or otherwise employing technology more productively. Thus, we do not expect significant pressure on growth or profitability for large retail banks, despite market share loss and price pressure. In other words, we expect the overall profits within the system to increase, reflecting largely the greater penetration of financial services, and improved efficiency in delivery. As a result, the financial system should become more diverse and more efficient while remaining profitable.

Goldman Sachs Global Investment Research 6 May 12, 2017 Brazil: Financial Services

BRAZIL’S BANKING SYSTEM in numbers

The System Today

UNDERBANKED POPULATION OVERBRANCHED, AT A COST

The percentage of Brazil’s branches owned by the Share of the population top five banks. The market has become more 12% over age 15 that borrowed concentrated since the financial crisis: in 2007, the 90% same statistic was 71%. (p. 9) (13% global avg) in the last year. (p. 11)

The number of bank branches per 100,000 adults in Percentage of the banked 2015, making Brazil one of the most “branched” 14% population that uses their 47 systems in the world. The branches are well-used, (21% global avg) account frequently. (p. 11) however; Brazil has the highest share of population reporting they go to a branch more than five times per quarter. (p. 10) Share of the population over age 15 that has The share of bank administrative expenses related 12% saved at a financial to branch operations. (p. 28) (23% global avg) institution. (p. 11) 50%

LENDING PAIN POINTS THE LONG ROAD… 50% vs. 12% 57% -3.6% The interest rate Brazilian banks charge The share of total lending that Brazil’s real GDP growth on loans, vs. the rate they offer depositors government-owned Brazilian banks held in 2016, the second- on savings. The lending spread, which at their peak (July 2016). This share straight year of economic signals a high cost of borrowing and high growth has put pressure on capital levels, contraction. (p. 19) opportunity cost of saving, is greater only which are lower at government banks in Malawi and Madagascar. (p. 12) than at private institutions. (p. 19)

The Future & Fintech

RO‘e’ TO RECOVERY 300-600 bps 40% higher 2.7% The amount we estimate banks’ return on The potential boost to operating income Our economists’ forecast for equity could improve by shifting half their incumbents could expect from digital real GDP growth in Brazil in clients to digital platforms, all else equal. clients vs. traditional branch clients, in 2019, after returning to The technology should also allow for better Itaú Unibanco’s estimates. (p. 28) expansion this year. This scoring of risk, underwriting standards and should support the uptake of overall use of banking services. (p. 28) fintech. (p. 19)

NEW ENTRANTS

The number of fintech companies already operating in Brazil. The largest share (31%) are in the 200+ digital payments space, but the pool is diversified. (p. 4)

Goldman Sachs Global Investment Research 7 May 12, 2017 Brazil: Financial Services

Why will the path in Brazil be different? Market concentration is high, penetration is limited, pricing is expensive

In the Future of Finance series, we have explored how changes in technology will affect financial markets and the way individuals secure products and services. In the United States, as well as the rest of the world, much of this evolution is driven by the shape of the market, as well as by regulation. These factors are different in Brazil, and as a result we expect them to have a differentiated impact. We see three main differentiating factors: market concentration, limited penetration of financial services, and pricing of products and services. Concentration of the financial services market: Creating opportunities as barriers to entry are overcome The Brazilian banking market is relatively concentrated when compared to other markets globally, and highly concentrated when compared to financial markets in more developed countries. The top five banks in Brazil (excluding BNDES, the state-owned national development bank) hold 84% of total loans, which although in line with some regional peers, is high compared to peers in more developed markets. Likewise, concentration in certain loan categories is high, especially in categories in which government banks have a large share (mortgages and rural). Another way to measure concentration is through the Herfindahl-Hirschman index (HHI). While not a perfect metric of competition, it captures market concentration, with 10,000 representing a perfect monopoly and 1 representing perfect competition. The HHI for Brazil’s financial system is at the upper end of the scale compared to global peers, and while it does not come off as high as financial sectors in some developing countries, it is much more concentrated by this metric than financial sectors in most developed markets.

Exhibit 2: The Brazilian financial industry is concentrated relative to global peers, in general and per product Key concentration metrics for Brazilian banks

Market share by loans (excl. development banks), 4Q2016 HHI for Brazilian financial system, by loan category as of 4Q2016 5,537 Other Caixa Economica 18% Federal 24% 4,112

Santander 1,771 8% 1,474 1,287 1,166 1,228

Bradesco 12% Banco do Brasil 22% Autos Payroll Itau Unibanco

16% Unsecured Mortgages Agricultural Credit cards Other credits HHI for by financial systems, by country as of 2015 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Italy USA Peru India Chile Israel Brazil Malta China Spain Latvia Japan Russia France Turkey Poland Ireland Cyprus Greece Austria Croatia Mexico Estonia Finland Sweden Bulgaria Belgium Portugal Slovakia Hungary Slovenia Romania Australia Denmark Germany Lithuania Colombia Indonesia Argentina Singapore Netherlands South Africa Luxembourg Czech Republic United Kingdom

Source: Brazilian Central Bank, European Central Bank

Goldman Sachs Global Investment Research 8 May 12, 2017 Brazil: Financial Services

The level of concentration in Brazil has created barriers to entry to the market, largely based on distribution. To compete effectively in retail, banks need large distribution networks in order to capture deposits and reach potential clients. Banks that fall below that threshold generate suboptimal returns and have over time been merged into larger banks. Since 2005, Santander Brasil (at the time with 1,090 branches) acquired ABN Amro Brasil (at the time with 1,148 branches), Unibanco (at the time with 965 branches) merged with Itaú (at the time with 2,854 branches), Bradesco (at the time with 4,483 branches) acquired HSBC Brasil (at the time with 854 branches) and Itaú Unibanco (at the time with 3,843 branches) acquired Citi Brasil (at the time with 127 branches). Currently, the top five retail banks own 90.2% of all the branches in Brazil. This is up from 71% in 2005, and is high compared to levels for regional and global peers.

Exhibit 3: Concentration of market share by branches in Brazil is higher than by assets, and has been increasing Brazil market concentration by branches

Market share of top five banks, by number of branches Market share, by branch, 4Q2016 Others 10% 90% Banco do Brasil 87% 87% 86% 87% 87% 87% 24% Santander Brasil 83% 83% 12%

71% 71% 71% Caixa Economica Federal 15% Bradesco 23%

Itau Unibanco 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 16% Market share of top five banks, by number of branches, 2015-2016 (most recent) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% UK US Italy Peru India Chile Israel Brazil Malta China Spain Latvia Japan Russia France Turkey Ireland Poland Cyprus Austria Croatia Mexico Estonia Porugal Belgium Bulgaria Slovakia Hungary Slovenia Romania Australia Denmark Germany Colombia Indonesia Argentina Netherlands Luxembourg Czech Republic

Source: Central banks or regulators by country, BIS Red Book, World Bank, SNL.

As highlighted in prior reports in the Future of Finance series, one of the main items disrupted by new technology is distribution. While large retail banks in Brazil attract and retain clients through a number of different means (e.g., service, branding, products and more recently, online service), the branch network is a powerful tool with which to anchor clients. By using a mobile app instead of going to a bank branch to transact in the financial sector, the barrier to entry created by branches can be surmounted. In our view, the relative concentration of the branch network in Brazil means the market is more vulnerable to disruption that affects distribution, and so the effects of disruption could be more visible than in other markets, such as the United States.

Goldman Sachs Global Investment Research 9 May 12, 2017 Brazil: Financial Services

Penetration: Mixed, but with much room for improvement On a global basis, penetration of financial services (% account ownership and usage, debit and credit card usage, propensity to save) is best explained by GDP/capita (R² is above 80%). That said, there are other factors that influence levels of penetration, such as culture, regulation and market structure.

 Culture. In Brazil, branch banking is among the most widespread and intensive in the world. There are still significant numbers of branches relative to the total population (and even more relative to the banked population), and the average number of visits per client is higher than in most countries (see Exhibits 4 and 5). Part of this is driven by security concerns, given the relative safety a branch provides to transact. In our view, this limits access to financial services to those that have the time, money and desire to go to branches.

Exhibit 4: There are many branches in Brazil… Exhibit 5: …that are most used than anywhere else Commercial branches/100,000 adults, 2015 % of survey respondents that go to branches >5X/Q, 2015

68 44 38

49 47 45 28 26 26 38 34 23 22 32 31 29 18 18 17 17 25 24 14 22 21 13 12 17 11 10 10 14 14 13 13 9 8 11 6 9 8 4 US UK US UK Italy Italy India India Brazil Brazil Spain China Spain China Japan Japan France France Poland Poland Mexico Mexico Canada Canada Sweden Sweden Australia Malaysia Australia Malaysia Germany Germany Singapore Singapore Hong Kong Hong Hong Kong Hong Swizterland Switzerland Netherlands Netherlands South Korea South Korea

Source: Bain. Source: Bain.

At the same time, the informal culture in Brazil (companies and individuals that do not transact through formal channels to avoid taxes) contributes to keep people away from the financial system. The decline in informality over the last 15 years was a strong driver, in our view, to the sharp increase in penetration that took place over that period.

 Regulation. Regulation takes many forms, but in Brazil regulations can limit penetration by making certain potential banking clients unprofitable. While there are no interest rate caps on loans, there are a multitude of taxes, capital requirements and other regulation that push people away from transacting in the financial system. For instance, some microlenders avoid Brazil because the combination of regulation and taxes does not allow for adequate returns on risk.

 Market structure. The relative concentration at the top has worked, in our view, to limit the penetration of financial services into certain niches, and in particular the lower income segments of the economy.

All this considered, compared to other emerging market and developed market peers, overall penetration of financial services in Brazil is relatively low (Exhibit 6). While the penetration of bank accounts is above average, the bank accounts are not as frequently used as in other countries. Also, savings and borrowing levels are also below global standards. Where Brazil is at an advantage to emerging market peers, though still lagging developed peers, is in the payments space. Use of debit and credit cards is strong, having developed much in the last 10 years on the back of the interest-free installment feature available on most credit card purchases.

Goldman Sachs Global Investment Research 10 May 12, 2017 Brazil: Financial Services

Exhibit 6: Outside of cards, penetration of financial services in Brazil is generally lower than global averages Key financial services penetration metrics, 2015

Metric (% age >15) Brazil vs. global comparables (highlighted: Mexico, China, Russia, India, UK and US) Have bank account MIN AVG MAX

0 50 100 High frequency of account use MIN AVG MAX

0 50 100 Saved at a financial institution MIN AVG MAX

0 50 100 Borrowed from a financial MIN AVG MAX

institution in LTM 0 50 100 Made payment using a debit card MIN AVG MAX

0 50 100 Has credit card MIN AVG MAX

0 50 100 Used credit card in LTM MIN AVG MAX

0 50 100

Source: World Bank.

Penetration is even lower when considering digital channels for banking. Brazilians make digital payments more frequently than peers (possibly as a result of bill payment technology that has been a staple for over 15 years). However, Brazilians make fewer mobile phone payments than peers (bank-related or not). Also, Brazilians use the internet less to make transactions (see Exhibit 7). Of course, this characteristic can also be a factor of the penetration of smartphones and the internet itself.

Exhibit 7: Brazilians use mobile phones for financial transactions less than peers Key digital banking penetration metrics, 2015

Metric (% age >15) Brazil vs. global comparables (highlighted: Mexico, China, Russia, India, UK and US) MIN AVG MAX Made or received digital payments 0 50 100 Made payment using a mobile MIN AVG MAX phone 0 50 100

Made transaction from an account MIN AVG MAX at a financial institution using a mobile phone (% with an account) 0 50 100 Used the Internet to pay bills or MIN AVG MAX buy things 0 50 100

Source: World Bank.

Penetration is even lower, however, in the lower-income parts of the population. By many metrics, the richest 60% of the population uses the financial system in line with or more than the global average (even if still well behind more developed peers). Although, the level of penetration for the poorest 40% of the population in Brazil falls well behind global averages in both penetration of overall financial services and digital financial services.

Goldman Sachs Global Investment Research 11 May 12, 2017 Brazil: Financial Services

Exhibit 8: Penetration of traditional and digital banking is lower for lower income classes Key financial services penetration metrics by wealth, % of people >15 years old, 2015

75 68 70 67 58 60 57 55 54 52 42 40 37 32 26 28 28 20 21 23 23 17 20 17 16 14 12 12 15 12 15 6 6 7

Have bank account High frequency of Saved at a financial Borrowed from a Made payment Has credit card Used credit card in account use institution financial inst. In using debit card LTM LTM

65 65 59 50 45 32 32 17 9 8 9 11 2 4 5 2 3 4 5

Made or received Made a payment Made transaction from Used internet to pay digital payments using a mobile phone fin. inst. acct. using a bills or buy things mob. ph. (% w/acct.)

Poorest 40% Brazil avg. Richest 60% US avg. Global average

Source: World Bank.

The opportunity for Brazil, in our view, lies in the further penetration of financial services and products into the entire economy. It would appear from the penetration data that the opportunity is more substantial for lower-income segments, which could see their access to financial services unlocked by technology.

Pricing: Expensive products, more expensive loan rates Another feature of the Brazilian financial market is its cost. Loans are expensive to take, and generally rank high in terms of cost relative to global and regional standards.

Lending rates in Brazil are amongst the highest in the world. Comparisons of this sort are tricky given differences in mix, position in the rate curve, regulation and, more generally speaking, market structure (the World Bank, the source for these statistics, acknowledges the shortcomings). While absolute levels may be slightly or even moderately different, the overall position within the ranking should hold, and Brazil ranks close to the top. This is even clearer when comparing lending spreads (loan rates less deposit rates) as opposed to pure loan rates.

Goldman Sachs Global Investment Research 12 May 12, 2017 Brazil: Financial Services

Exhibit 9: The cost of borrowing in Brazil is one of the highest in the world Lending rate and spread per country, 2015

70% 60% 50% 40% 30% 20% 10% 0% US Italy Peru India Chile Israel Brazil China Russia Nigeria Mexico Malawi Canada Ukraine Vietnam Hungary Thailand Australia Paraguay Colombia Indonesia Argentina Philippines Switzerland Madagascar South Korea South Africa South

Lending rate Spread

Source: World Bank.

There are specific reasons for rates and spreads in Brazil to be higher. Many have to do, as mentioned above, given regulation and taxes (particularly the latter). But others have to do with information, or the lack thereof. Brazil has a negative credit bureau (which tags the bad behavior of non-payers, but does not follow the good behavior of payers), but efforts to develop a positive credit bureau (which would reduce lending risks and spreads) have been mixed so far (though a more robust offering is in the works). Banks do not share borrower information with each other, thus increasing the chance of Type I and II errors. No information is shared with potential entrants, which limits competition by diminishing visibility on potential returns. Government is applying pressure on banks to lower spreads, but we believe competition – arising from disruptive technological advancements that improve the flow of information – would likely be more successful.

As for fees, consistent data are difficult to come by. Each country has a different set of regulatory requirements for basic services and pricing, and the degree of depth of these regulations also varies. Banks also provide discounts based on usage and account balance based on commercial strategy. As a result, there is no common basis for comparison, or even a database that catalogues bank fees across different countries.

Exhibit 10: Account maintenance fees in Brazil appear to Exhibit 11: Including income distribution also places be higher than those in other countries Brazilian banks as one of the most expensive Monthly account maintenance fee/GDP per capita, 2015-2016 Avg. bank fees / disposable income per capita x GINI coeff., 2015

1.69 0.80 0.77 1.38 0.63 1.17

0.43 0.36 0.56 0.29 0.27 0.47 0.45 0.24 0.22 0.22 0.39 0.18 0.23 0.10 0.10 0.18 0.06 0.05 0.04 0.02 0.01 UK US Italy Italy Peru India India Chile Brazil Brazil Egypt Spain China Russia Turkey Mexico Canada Canada Hungary Thailand Malaysia Australia Germany Colombia Colombia South Africa South Africa

Source: Company data, central banks, Goldman Sachs Global Investment Source: BCG. Research.

Our analysis of average account maintenance fees (Exhibit 10) is based on data gathered from central banks and regulatory entities, as well as fees charged by the top banks in certain countries. Using GDP/capita as a measuring stick, it would appear that banks in Brazil charge relatively high account maintenance fees compared to peers – though we

Goldman Sachs Global Investment Research 13 May 12, 2017 Brazil: Financial Services

stress the relative position is more relevant than the actual figure. The Boston Consulting Group (BCG) also analyzed bank fees across several countries (Exhibit 11), comparing it to disposable income and the GINI coefficient – while the results are not exactly alike, Brazilian banks rank as expensive as well. This analysis also shows that the high fees affect the lower income population more disproportionately, stymying financial penetration.

In Brazil, in 2013 the central bank established basic services that are free of charge with every bank account (also at no monthly maintenance cost to the client). For additional services, the client would have to pay on an ad hoc basis or engage in one of four standard categories of basic checking accounts service packages (Exhibit 12). However, in many cases, the banks can waive fees for accounts that maintain a minimum balance or have payroll associated with them. Even thus, the account is not really free, as the maintenance fees associated with it would just go to subsidize another of the bank’s businesses.

Exhibit 12: The amount of transactions included in standard service packages is limited Number of transactions per month, average cost to client per package, 2017

Average Last 30 day Other Transfers to Transfers cost/ month Category Checks Withdrawals statement statement other banks within bank (US$) Basic 10 4 2 0 0 2 0.00 I 0 8 4 2 0 4 8.82 II 12 8 6 2 1 4 13.37 III 15 10 8 4 2 6 21.05 IV 20 12 8 4 3 8 26.85

Source: Brazilian Central bank.

Exhibit 13 shows the minimum, maximum and average fees charged for certain bank services in Brazil, as per the Brazilian central bank as of May 2017. When comparing the cost of these services to those rendered by banks in other countries, the differences in average wealth should be considered (GDP per capita in Brazil is US$8,500, while in the United States it is US$57,000).

Exhibit 13: Fees per bank service can vary dramatically in price from bank to bank Range and average price for selected banking services, May 2017; in US$

Service Min Average Max Account opening fee 0.00 139.52 952.38 Additional check (per check) 0.00 1.44 19.05 NSF fee (per check) 0.00 9.44 31.75 ATM withdrawal (per withdrawal) 0.00 0.64 4.76 Transfer to other bank (per transfer) 4.76 4.76 4.76 Internet transfer to other bank (per transfer) 1.59 1.59 1.59 Transfer to same bank (per transfer) 0.00 1.40 15.87 Overdraft fee 0.00 12.65 92.06

Source: Brazilian Central Bank.

Goldman Sachs Global Investment Research 14 May 12, 2017 Brazil: Financial Services

Why will fintechs make a difference now? Convergence of concentration, technology and economic cycle

Fintechs have, in one form or another, existed in Brazil for much of the last 10 years. As mentioned above, some of the conditions of the Brazilian market, in particular the strong concentration of banking and other financial services in the hands of a small number of companies, create a favorable environment for disruption, but they have also existed for some time. That said, in the past few years other factors have changed, which we see as creating a more receptive environment for disruption. First, concentration in the banking system has increased. Second, the penetration of technology, particularly smartphones, has increased to the point at which the business models of several of the fintechs can reach critical mass, benefitting also from demographics that are more open to change. Third, the downturn in the economic cycle, and the expected recovery in the next few years, could create the opportunity for new companies to emerge and grow with economic activity.

Market concentration: Increasing as mergers come through Market share concentration has been increasing in the Brazilian financial system for much of the last 20 years. Mergers between some of the largest banks in the system (Santander and ABN Real, Itaú and Unibanco, Bradesco and HSBC), as well as the growing presence of government-owned banks and the development of mortgages, have led the share of total loans of the top 5 banks (excluding development banks) in the system to increase to 84% in September 2016 from 62% in 2000.

Exhibit 14: The share of total loans for the top five banks Exhibit 15: …As has the HHI index for the industry in Brazil has increased consistently over time… Herfindahl-Hirschman Index by assets Top 5 bank share, excluding development bank

85% 1,400 80% 1,300 75% 1,200 1,100 70% 1,000 65% 900 60% 800 55% 700 50% 600 45% 500 40% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 3Q2016 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Brazilian Central Bank. Source: Brazilian Central Bank.

The effect of concentration can be observed, to some degree, in the satisfaction levels expressed by consumers. According to the Sindec report, which aggregates complaints to consumer protection agencies throughout the country, financial services is the categories with the second-most complaints, just behind media/telecom services but well ahead of other consumer-facing services and products. The level of complaints has risen slightly over the last three years, even as banks invested in technology and tried to improve the user experience.

Goldman Sachs Global Investment Research 15 May 12, 2017 Brazil: Financial Services

Exhibit 16: Financial services receive the second-most Exhibit 17: Despite significant investments in technology, complaints at consumer protection agencies the share of complaints has declined only slightly Share of complaints, consumer protection agencies, 2015 Share of complaints over time

Other 35% Electronics 35% 30% Furniture 3% 5% 25% Utilities 20% 5% 15%

Mobile phones 10% 5% 5%

0% 2012 2013 2014 2015 2016 Financial Telecom/media Telecom/media Financial services Mobile phones services 30% Utilities Furniture Electronics 17%

Source: Sindec report. Source: Sindec report.

The more concentrated a market is, in our view, the higher is the barrier to entry created by a branch network, and as a result the more vulnerable the system is to disruption from new technology and mobile-based distribution models that erode that barrier to entry.

Technology creating opportunity: Smartphones and internet access feeding demographics The second ingredient that is enabling the emergence of fintechs in Brazil is the combination of technology and demography. Technology, in large part, refers to the growth and penetration of internet-enabled mobile phones (smartphones), as well as desktop internet access. Demographics refer to the development of a generation of better- educated, more-connected individuals into the workforce and into the age bracket associated with greater consumption of financial services.

Internet and smartphones: On the rise Internet use in Brazil has been increasing over much of the past decade (user numbers have been increasing at a CAGR of 11% since 2005), largely in line with global trends (CAGR of 9% since 2005). The number of internet users is above the overall global average, as per the World Bank, while the use of broadband to connect with the internet appears to be in line with the average. According to the Brazilian geography and statistical agency, the IBGE, internet use is higher in upper income levels than in lower income levels, and more prevalent amongst individuals with more years of education, as well as those between ages 15 to 34. Most users access the internet through a combination of desktop computers, mobile phones and tablets.

Penetration of mobile phones in Brazil is relatively high, with more mobile phones per capita than in the United States or the United Kingdom, according to the World Bank. The Pew Research Center has noted that in 2015 86% of Brazilian adults had a mobile phone, compared to an average of 86% in 39 countries researched (and up from 73% in 2010). Also according to the Pew Research Center, 48% of all mobile phones in Brazil as of 2015 were considered smartphones, compared to 19% in 2013. This level of penetration of smartphones is in line with the global average, but falls short of levels in developed markets.

Goldman Sachs Global Investment Research 16 May 12, 2017 Brazil: Financial Services

Exhibit 18: Mobile and internet usage has increased consistently, placing penetration in Brazil at the global average Mobile penetration, key statistics

Mobile phones per 100 people Internet users per 100 people 160 90 140 80 120 70 60 100 50 80 40 60 30 40 20 20 10 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Brazil World OECD Latam Brazil World OECD Latam

Metric, 2015 Brazil vs. global comparables (highlighted: Mexico, China, Russia, India, UK and US) Brazil avg., poorest 40% vs. richest 60% Mobile cellular subs. per 100 MIN AVG MAX

people 0 50 100 150 200 250 300 350 % of cellular phones are MIN AVG MAX

smartphones 0 50 100 03060 Fixed broadband subs. (per MIN AVG MAX

100 people) 0 25 50 Access mob. phone or

internet at home (% >15) 90 93 95 Internet users (per 100 MIN AVG MAX

people) 0 50 100

Source: World Bank, Pew Research.

There is a strong correlation between smartphone penetration and wealth (as measured by GDP per capita). In part, this relationship appears to replicate the one that existed between mobile phone ownership and wealth as of 2002. That relationship has, however, changed over time as technology and cost for mobile phones have advanced. It is possible that with time, lower costs and improved technology will lead smartphone penetration to be more similar to current mobile phone penetration.

Exhibit 19: Smartphone penetration today, which is correlated to GDP/capita, is at a similar level to mobile phone penetration in 2002 Penetration of smart/mobile phones per income level over time 120 2015 mobile phone 100 2007 mobile phone 80

2002 mobile phone, 60 2015 smartphone

40 % of people with

0 0 10,000 20,000 30,000 40,000 50,000 60,000 GDP per capita

Source: Pew Research, World Bank. Demographics: A generation comes of age There are two demographic trends that should help support adoption of technology in Brazil.

The average age of the Brazilian population is rising. This is as much driven by the greater longevity of older generations as it is by the demographic bonus from the 1990s, when there was a large surge in population growth. This generation from the 1990s is tech-savvy, having grown up with mobile phones and the internet, and has little memory of the

Goldman Sachs Global Investment Research 17 May 12, 2017 Brazil: Financial Services

difficulties of the high-inflation/low-growth 1980s. It is now entering its years of greatest productivity, which means more wealth to acquire technological products and services, as well as a greater propensity to use them.

At the same time, this generation has also been one of the most educated in Brazilian history. This was driven by the proliferation of college-level education throughout the country, as well as financing made available by government programs to pay for college level education. Given the strong correlation between level of education and tech familiarity and usage, this generation is much better prepared to use internet and mobile- based products and services than any before it at the same part of the life cycle.

Exhibit 20: Brazil’s demographic bonus is now entering Exhibit 21: The average amount of time of education has its most productive years increased consistently in the last 10 years % of the population by age Years of education

12 >65 8.2% 10 55-64 8.8% 8 45-54 12.1% 6

35-44 14.8% 4

25-34 16.8% 2

15-24 16.6% 0 10-19 20-29 30-39 40-49 50-59 >60 0-14 22.7% 2006 2011 2015

Source: IBGE. Source: IBGE.

Economic recovery: Emerging from a deep dive The Brazilian economy has been going through a poor economic cycle, with real GDP contracting for much of the last two years. Unemployment has climbed to the highest levels since 2002, and real wages have contracted by 5% since the peak in January 2015.

Exhibit 22: Economic activity declined significantly in the Exhibit 23: Unemployment has reached the highest levels last three years in the past 20 years Real yoy growth in GDP Unemployment rate

10% 14% 8% 12% 6% 10% 4% 2% 8%

0% 6% -2% 4% -4% 2% -6% -8% 0% Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Source: IBGE. Source: IBGE.

However, over the past nine months economic trends appear to be shifting. Inflation, which had been high and had hurt economic activity, has declined, allowing the central bank to reduce benchmark interest rates. Structural reforms have been approved in Congress, with more on tap to be discussed in the next 12 months. While on a nominal basis the Goldman Sachs Latin American economists still expect benchmark interest rates to fall below 10% by year-end 2017, the combination of structural reforms and fiscal discipline could create the conditions for an even more substantial decline in interest rates, which would unlock key markets (such as life insurance, equity markets investing, and others) that have historically been stymied.

Goldman Sachs Global Investment Research 18 May 12, 2017 Brazil: Financial Services

Even if the road ahead is not completely clear, the arrow for the Brazilian economy appears to be pointing upwards, which in our view helps the development of fintechs in the country. Goldman Sachs economists have GDP growth accelerating to 0.6% in 2017, and then up to 2.6% in 2018.

Exhibit 24: GS economists have the Brazilian economy posting a recovery over the next three years Main economic forecasts, Brazil

2015 2016 2017E 2018E 2019E Real GDP growth -3.8% -3.6% 0.6% 2.6% 2.7% CPI 9.0% 8.7% 4.1% 4.6% 4.4% Benchmark rate (SELIC) 14.3% 13.8% 8.8% 8.8% 8.8% Unemployment 8.3% 11.3% 13.1% 12.6% 11.7% Fiscal balance (% of GDP) -1.9% -2.5% -2.0% -1.5% 0.0% Public sector debt (% of GDP) 35.6% 46.0% 40.5% 42.0% 43.0% FX rate (R$/US$) 3.90 3.26 3.25 3.30 3.37

Source: Goldman Sachs Global Investment Research.

Economic cycle hitting banks: Banks pulling back, reducing footprint Brazilian banks have been actively managing their cost bases, in terms both of headcount and of branch network. This process has continued since 2012, with the objective of improving profitability – at first to counteract the effects of record low benchmark rates, and then to counter the impact of the ongoing NPL cycle. While this has not, for the most part, perceptibly affected revenue generation for the banks, we believe it may have kept some potential clients away from the financial system. In part, we see fintechs filling the space that was vacated by traditional retail banks.

Exhibit 25: Banks have cut both headcount… Exhibit 26: …and their branch network size since 2013 Headcount per bank, 1Q2014=100 Branch network, 1Q2014=100

115 120

110 115 110 105 105 100 100 95 95

90 90

85 85 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Banco do Brasil Bradesco Itau Unibanco Banco do Brasil Bradesco Itau Unibanco Caixa Economica Federal Santander Brasil Caixa Economica Federal Santander Brasil

Source: Company data. Source: Company data.

Another trend that could help is the crowding-in of the financial system. Since the end of 2008, government-owned banks have gained market share in total lending in Brazil, peaking at 56.7% in July 2016 from 40% in 2008. This crowding-out happened in a number of categories (including corporate and consumer) and for all government owned banks (Banco do Brasil, Caixa Economica Federal and BNDES). However, this strong growth, along with relatively low levels of profitability, has put pressure on capital levels, which are well below those of private sector peers.

Goldman Sachs Global Investment Research 19 May 12, 2017 Brazil: Financial Services

Exhibit 27: Government-owned banks increased their Exhibit 28: Capital levels for government-owned banks market share in the last five years are generally lower than for private-sector peers Market share by bank ownership Capital ratio breakdown, 4Q2016

BB CEF BNDES 100% Core Tier I ex-hybrid instruments 7.2% 3.1% 8.7% 90% Hybrid instruments elegible for Core Tier I 1.0% 6.3% 5.8% 80% Core Tier I 8.2% 9.5% 14.5% 70% Complementary capital 3.2% 0.0% 0.0% 60% Tier I 11.4% 9.5% 14.5% 50% Tier II 4.7% 4.1% 7.2% 40% Total capital ratio 16.1% 13.5% 21.7% 30% ITUB BBD BSBR 20% Core Tier I ex-hybrid instruments 15.8% 11.2% 14.0% 10% Hybrid instruments elegible for Core Tier I 0.0% 0.0% 0.0% Core Tier I 15.8% 11.2% 14.0% 0% Complementary capital 0.1% 0.8% 1.1% Tier I 15.9% 12.0% 15.1% 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Tier II 3.2% 3.4% 1.2% Public Private Total capital ratio 19.1% 15.4% 16.3%

Source: Brazilian Central Bank. Source: Company data.

As economic activity recovers from the downturn, we expect loan growth and financial intermediation to recover as well, even though we see that recovery happening at a slow pace. However, with the government-owned banks less capable of expanding their balance sheets given tight capital levels, this could open the door to private market banks/ companies gaining share. This “crowding-in” as growth resumes could create an untapped market for fintechs to breach, providing support for the initial stages of companies’ development cycle. Recovery helps usage: Use of technology improves with employment, wealth Improved generation of wealth should lead to greater usage of financial services provided by intermediaries: the prevalence of deposits, payments, spending, investment and financing is positively correlated to wealth. In addition to that, greater levels of economic activity could lead to more penetration of internet/mobile telephony use. The IBGE tracks internet and mobile telephony usage according to social class level and employment. Both internet and mobile telephony usage are positively correlated to social class and employment. As the economy recovers, with employment and real wages going up, individuals should use more of the internet and mobile phones, both of which are gateways for fintechs.

Exhibit 29: Employed individuals are more likely to own Exhibit 30: Mobile, and in particular, internet use mobile phones and use the internet increases as income increases % ownership of mobile phone/internet use, 2015 % ownership of mobile phone/internet use, 2015

87% 97% 93% 96% 92% 87% 89% 82% 68% 77% 76% 63% 72% 68% 71% 58% 51% 49% 55% 45% 37% 33% 32%

13%

No income 1/4 to 1/2 1/2 to 1 1 to 2 2 to 3 3 to 5 5 to 10 More than to 1/4 minimum minimum minimum minimum minimum minimum 10 Possess Do not possess Possess Do not possess minimum wage wage wages wages wages wages minimum Employed Unemployed wage wages

Mobile Internet Mobile Internet

Source: IBGE. Source: IBGE.

Goldman Sachs Global Investment Research 20 May 12, 2017 Brazil: Financial Services

Interview with Banco Original

“We believe a broad-based recovery in economic activity in Brazil should lead to greater usage of the financial system, and of more interest in services that provide alternatives to the traditional financial system.“

-Guilherme Stocco Filho (Director of Innovation)

What do you say have been the main developments (regulatory, technological, etc.) in the last few years that have allowed you to compete with incumbent banks on more of an equal footing? The digitization of the economy is breaking down the boundaries between the traditional and the incumbent banks. Financial services are digital products and the main entry points to transact are the web and mobile devices; this shift has given a lot of power to banks that are using new technology and don’t need to manage legacy systems. Creating a new bank nowadays, with the latest technology, is much easier than it used to be; the cloud, blockchain and the penetration of smartphones help in all of that.

The regulators are aware of that – we have started to see a trend around the world to help the incumbents, in Europe with the advance of PSD2 and in Singapore and the UK the Regulatory Sandbox. In Brazil, Banco Original was the first bank to be approved by the central bank to use the cellphone to open a bank account.

Soon you will be able to open a bank account in the same way that you open your Facebook account, and that changes everything as all the population will have access to banking services. How do you differ from incumbent banks in what you offer to you clients (price, quality, accessibility, etc.)? Pure Digital Banks have fewer costs than traditional ones – the use of new technologies and the lack of legacy systems help – but that is not the only factor: new business models and a new culture help to create new opportunities for cheaper, powerful services. If you create a human-centric app and use AI to help you to understand your client you will always be more relevant and cheaper than traditional systems. What are the key challenges you are facing over the next three years? In my opinion, in five years the financial industry will change hands; different people and companies will lead. To survive in this complex world the banks will need to be agile, change culture and embrace new technology, which must happen quickly if they want to participate in this new and challenging world. Which banking segments (cards, asset management, deposits, insurance, etc.) do you believe are more vulnerable for incumbent banks, and what have you learned from international peers? All of the verticals are ready for disruption. Credit card infrastructure is expensive and depends on plastic cards to work – soon we will have only mobile payments. Insurance will use personal data to customize its services for each individual at the right time. Asset managers will need to compete with sophisticated robot advisors. The list goes on with frequency trading, blockchain and globalization. Soon we will not be talking about incumbent banks but Fintech startups, who will be challenging even the incumbent banks. That is why “agile” is the key word for survival.

Goldman Sachs Global Investment Research 21 May 12, 2017 Brazil: Financial Services

Canvassing fintechs: 200 strong and growing

Finnovista, a Mexico-based fintech accelerator, counted at least 214 fintechs in Brazil as of November 2016. Fintechlab, a Brazil-based fintech monitor, tallied 247 fintechs in Brazil as of February 2017. As noted by Fintechlab, the number of fintechs has increased from 54 in August 2015.

According to Finnovista, this is the highest tally in the Latin American markets it tracks, well ahead of Mexico and the Andean countries. Most of the fintechs in Brazil are focused on the payments space, though there are still many in personal finance management, lending and enterprise finance management.

Exhibit 31: Brazil has the largest number of fintechs in Exhibit 32: Most fintechs are in the payments space, but Latin America the spread is diversified Fintech companies per country Brazilian fintechs per industry

Crowdfunding Insurance 8% 214 5% Banking Payments 2% 31% 158 Scoring/ identity 5%

Trading 3% 77 Enterprise 60 56 financial management 15% Wealth Personal finance management/ management savings Lending 11% Brazil Mexico Colombia Argentina Chile 8% 12%

Source: Finnovista. Source: Finnovista.

The companies are, for the most part, located in the state of São Paulo, which accounts for roughly 30% of the Brazilian economy, though there is a presence in Rio de Janeiro and in the south of Brazil. Most of the companies are focused exclusively on Brazil, though some have a presence abroad (largely if they themselves are subsidiaries of fintechs established in other countries). Most of the companies target retail clients, be they SMEs or consumers, though there is no predominant IT platform or strategy. Just over a third of the companies are expanding their presence, while less than 20% are in the early development stages of the business. As such, more than half of the fintechs in Finnovista’s poll are raising funds to support future growth.

Goldman Sachs Global Investment Research 22 May 12, 2017 Brazil: Financial Services

Exhibit 33: Most Brazilian fintechs are in São Paulo and focus only on Brazil, but otherwise target a diverse set of customers using different technologies Key metrics for Brazilian fintech

LOCATION BY STATE FOCUS OF OPERATIONS TARGET CUSTOMER Expanded Banked SME Financial Other abroad 7% 10% inclusion SME 22% and consumer 28%

B2B corporate Porto Alegre and fFI 6% Sao Paulo 34% 54% Belo Horizonte 8%

Rio de Janeiro B2C banked 10% Only Brazil consumer 90% 31% MAIN TECHNOLOGY MATURITY FUNDRAISING Big data & Beta version Other tech analytics 12% 19% 20% Demo/ prototype Growth and 5% expansion 35% Not in Crypto & fundraising Blockchain 42% 9% Mobile & apps Product launched Currently 16% 23% fundraising Machine learning 58% & AI 10% Open platforms Cloud computing & APIs Ready to scale 12% 14% 26%

Source: Finnovista.

Exhibit 33 shows the main areas targeted by fintechs, the rationale behind the companies, the potential revenue pool in 10 years for each area, and examples of companies in Brazil and counterparts in the United States.

For the estimated potential revenue pool in 10 years, we estimated market growth based on nominal GDP and an average market share of 15% for new entrants. The estimated revenue pool for banking services is the equivalent of the sum of the revenue pools for payments, personal finance management, lending and investments/wealth management. As a result, we see a total profit pool for new entrants of up to R$75 billion in 10 years.

For more details on segments and profiles on specific companies, please see the Appendix.

Goldman Sachs Global Investment Research 23 May 12, 2017 Brazil: Financial Services

Exhibit 34: We classify Brazilian fintechs into six major categories Breakdown of Brazilian fintechs

Area Rationale Potential revenue Companies in Brazil Comparables in US pool in 10 years (R$ billion/yr)

Banking The Brazilian banking market is highly concentrated, Banco Original, Banco ING Direct services which increases costs and limits penetration. Neon, Zuum, Conta Regulation and technology are breaking down barriers Um, E-dinheiro to entry related to distribution, clearing the way for new entrants in a process that could shrink asset and 50 liability spreads and increase penetration. Model would extend from full-service virtual banks to simple e-wallets.

Payments Despite Brazil being one of the most developed in Stone Pagamentos, Venmo, Square, Latin America, the Brazilian payments system is PicPay, ValePresente, Braintree, Google concentrated and offers limited functionality given Ta Pago, PagPop Wallet older technology. New entrants leverage the latest 12 technology in acquiring, payment processing, and money transfers, with solutions in both the P2P and B2B spaces.

Personal Brazilians have historically had limited tools with GuiaBolso, Quero Credit Karma, Mint, finance which to manage personal finances, which has led to Quitar, Konkero, Earn Up management greater usage of expensive loans and poor allocation Organizze, Quanto of resources. Companies are using internet-based 6 Gastei, Poupa Certo, solutions to help users manage accounts and Meu Dinheiro, Ghaio renegotiate loans, as well as to provide marketplaces Kitado, Acordo Certo for new loans and savings products.

Lending The average annual lending rate in Brazil is 32%, but NuBank, Geru, Nexoos, Lending Club, Sofi, can reach up to 15% per month for certain personal Credisphera, BKF Affirm, LendingTree, loans. Part of this is driven by the limited amount of Online Credible, Lendio, information borrowers and lenders have on each Fundera other, as well as shortcomings in distribution. 22 Companies are using internet- and mobile-based platforms, along with innovative business models, to bridge the gap between savers and borrowers, both within and outside the financial system.

Investments, Saving money in Brazil, particularly for the lower Magnetis, Órama, Betterment, Wellfront, savings, income strata, has been left to retail banking products SmartBrain, Ellevest, Envestnet, wealth with low yields, a result of limitations in distribution Investeapp, Verios, Fundrise management, and information, as well as market concentration. SmarttBot, Warren, trading Through easy-to-use online platforms, new companies 10 Easynvest, Yubb, are offering users alternatives to invest in equity and Renda Fixa, Meus fixed income products, either directly or indirectly Ynvestimentos, through comparison tools that highlight advantages controlAção and disadvantages of each product.

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 24 May 12, 2017 Brazil: Financial Services

NuBank: Becoming a force in credit cards

History NuBank was launched in May 2013 in São Paulo by David Velez. The objective was to change the way Brazilians used credit cards, from the application to obtain a card, to the purchase, to the revolving credit line. The first purchase with a NuBank-issued card was in April 2014, and the company has since expanded to over 500,000 cardholders. Since its launch, the company has received over US$200 million in funding from six venture capital/private equity funds. Business model The main features of the NuBank card (all with the MasterCard brand) are that it is uncomplicated and free. There is no annual fee for the card, regardless of the purchase history or time with the card, which represents a sharp break from tradition in Brazil. To obtain a card, an applicant needs to be invited by another cardholder, and then go through a credit scoring system based on proprietary technology. Once with the card, there is no paperwork – all bills and interactions between cardholder and issuer are done through a mobile phone app (though a website is available). Different from other issuers in Brazil, there is also no need to go to bank branches or ATMs to activate the card. Because NuBank is not a financial institution, lending is carried out by partner banks, with funding supported by a receivables guarantee fund. The call center is operated in-house, to assure quality in every interaction with clients. The company also recently launched a rewards program for cardholders. One differentiated feature is that cardholders can pre-pay installments from interest-free installment purchases. Evolution Since its inception, NuBank has received over 9 million applications for credit cards, and currently has over 500,000 cardholders, making it by far the fastest-growing issuer in the period. In 2016, the company generated R$77 million in revenues (a seven-fold increase over 2015), and a net loss of R$122 million (compared to a loss of R$32 million in 2015). While other operating metrics are unavailable, the company says that its NPL ratio is well below industry standards, both a result of its mix of clients and its strict loan underwriting standards. NuBank has also gained visibility among clients as a trustworthy and efficient provider of financial services, a substantially different perception from that of the banks. Response With NuBank’s advance, incumbent banks felt the need to respond. While there was some investment in technology to make payments and access to credit cards more transparent, the main competitive response came from Banco do Brasil and Bradesco, which launched a digital card named Digio. Similar to NuBank, Digio’s main cardholder interface is a mobile app. Also similarly, it charges no annual fee. However, there is no revolving credit feature – all unpaid balances can be converted to installment loans. To obtain a card, a simple application is required, which can also be done at Bradesco and Banco do Brasil branches. Our take NuBank’s development followed a path that we believe may be replicated in several segments. To start, the credit card market, with its high lending rates, complex fee structure and relatively tight market share, appeared to be primed for a change. Then, a newcomer with a differentiated and disruptive technology launches a user-friendly product that is able to gain much visibility and some market share. Incumbent banks respond by launching a product with similar features, beginning to establish a new competitive balance while at the same time improving the client’s experience and lowering prices. This should increase penetration, expanding the market and partially offsetting lower prices. We expect there will be companies in other segments that will also initiate a process of disruption that should dislodge or affect incumbents, although – because of the initial state of the market – changes could take longer to materialize.

Goldman Sachs Global Investment Research 25 May 12, 2017 Brazil: Financial Services

What will happen to banks? Moving from bricks to clicks

As the fintechs in Brazil start to gain market share in each of their respective markets, as well as open some new markets that are as yet unexplored, we expect Brazilian banks to react. This reaction could come in several ways, with the most visible, in our view, being to mimic the products and services being launched by fintechs. We believe the one with the greatest impact, however, to be the adoption of virtual banking. Both processes, however, accelerate the migration from bricks to clicks, and as such validate the changes being brought about by the fintechs. The end result, in our view, is that banks may lose some market share (more a factor of experiencing slower growth than foregoing growth completely) and margins (as a result of competition), but both these negatives can be offset by gains in efficiency, reduced cost of risk and greater penetration.

Copycat: Mimicking fintech solutions One of the strategies being used by banks to stem the flow of fintech innovations and disruption has been to imitate the products and services being launched by fintechs. However, many times the banks add their own spins to the products, which sometimes change what has made the product successful for fintechs. Examples of this practice are:

 Digio, by Bradesco and Banco do Brasil. In November 2016, Bradesco and Banco do Brasil launched a new credit card named Digio. It was a fully virtual card, attempting to replicate the model successfully used by NuBank. Much like NuBank, all interactions were to be done via mobile, on a simple platform, and there is no annual fee. However, different from NuBank, there is no network vetting of applicants, and the cards can also be applied for in Banco do Brasil and Bradesco branches.

 Distributing third-party funding alternatives. Recently, large retail banks have started distributing funding products from other smaller banks to selected groups of clients (usually high net worth clients). This is a response to Orama and Easynvest, which offer several different savings products through their online platform. However, the banks charge a higher fee in distributing the funding products from other banks, which makes the yields less attractive than the same products offered by fintechs. At the same time, it is a reflection of the large amount of excess liquidity in the Brazilian financial system, in part a result of the limited amount of loan growth in the last few years.

 Virtual banking platforms. Itaú Unibanco has over one million clients enrolled in its virtual banking platform. Through this platform, the bank interacts with clients primarily via internet, mobile and telephone, offering branch-like services in a virtual form 18 hours a day (as opposed to six hours of branch banking). Clients are generally of the upper income levels, which the bank believes would prefer this new model of interaction.

Bradesco is considering launching a fully virtual bank, which would be separate from its regular branch-based offering, though still operating within the same IT platform. Services would be similar to the ones provided by Banco Original or Banco Neon.

However, because the services (for both Bradesco’s new online bank and Itaú Unibanco’s virtual banking operation) would still be provided within the framework of a retail branch-based bank, they would be subject, in our view, to the limitations of the processes and procedures laid out for branch banking. Moreover, the culture of the new ventures would still largely be that of the underlying banks, making it more difficult to adopt and develop truly disruptive technology.

 Bankrolling fintechs. Both Itaú Unibanco (Cubo) and Bradesco (InovaBRA) have established fintech accelerators. These accelerators host conferences for fintechs, and

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many times hire services from the companies on a temporary or permanent basis. Other times, the banks invest directly in fintechs, mostly through minority stakes. That said, the most visible and successful fintechs (such as NuBank and GuiaBolso) have not come from these accelerators.

Breaking the traditional model: Drive to virtual banking One of the main trends set to shape the Brazilian banking market over the next 10 years is the drive to virtual banking. Even if the banks do not currently appear to have the culture to truly drive such a disruptive process, they will adopt new technology over time and this will change the way they interact with clients, deliver and price new products, manage their physical footprint and deploy their capital. The clear areas for improved performance come from, in our view, improved operational efficiency, better loan underwriting practices and greater penetration of financial services.

Improved operational efficiency: Beyond branch closing Banks constantly pursue improvements in operational efficiency, but as mentioned above this process has intensified in the last few years. This has largely taken the form of branch closings and headcount rationalization. But because the Brazilian economy has undergone a long and deep recession over the last three years, it is difficult to separate the adjustments made for cyclical reasons (the recession) from those made for structural reasons (the changing nature of branch banking). That said, we expect the structural adjustments to start gaining steam over the next two to three years, leading to more significant investments in IT, further branch closings and reductions in headcount.

Exhibit 35: Digital transactions (internet and mobile) have Exhibit 36: Roughly three quarters of all bank become increasingly relevant for banks over the last transactions in the top Brazilian banks are digital years Breakdown of transactions, Bradesco, Itaú Unibanco, Banco % of transactions done through internet/mobile platforms do Brasil

Other 90% 6% 80% 70% ATM/Branches 60% 22% 50% 40% 30% 20% 10% 0% Digital 2008 2009 2010 2011 2012 2013 2014 2015 2016 (internet/mobile) 72% Itau Unibanco Bradesco Banco do Brasil Santander Brasil

Source: Company data. Source: Company data.

Brazilian banks are amongst the country’s largest investors in IT. Investments in systems, storage and software have increased consistently over the last ten years. Itaú Unibanco is currently investing over US$3 billion in a state-of-the-art data center 100 km from São Paulo that, when completed, will multiply the bank’s processing capacity by 16 times and increase storage space by 25 times, with the possibility of further upscaling. As banks migrate further into virtual banking, we expect investments in IT to continue to grow – though a part of the expansion may ultimately be driven by outsourcing.

The expense savings from the push to virtual banking would come from a smaller physical network, in terms both of headcount and other operational costs. As client interactions move online, the optimal amount of branches to operate would change (assuming that

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branch banking will still be a partially viable model with at least some of the population in 10 years). At the same time, estimating potential cost savings from branch closures is tricky, as banks do not provide a breakdown for expenses that discriminates between expenses at the branch level and at corporate. We estimate that in 10 years banks will be able to improve ROE by between 300 bp and 600 bp from expense savings associated with branch closings (see Exhibit 37). There could be gains on the fee or interest income side that are not considered in our estimate.

Exhibit 37: We see banks improving ROE by up to 600 bp with branch closings and other improvements from a push towards digital banking Bank savings from virtual banking

Estimating branch closings Cost associated with bank banking Benefit to the bottom line Itaú Unibanco’s foray into virtual banking We estimate that roughly 30% of bank offers a proxy. In 2016, the bank added employees work in branches, which, 631,000 clients into its virtual banking + together with expenses for security, = +300 bp to 600 bp platform (up to 1.7 million out of nearly 26 transport, rent and others end up being to ROE million total clients). At the same time, the responsible for 50% of total admin bank reduced the branch network by 168 expenses. As a result, a 50% reduction in locations (down to 3,653). Assuming that the total number of branches would lower That said, there could also be additional 30% of the reduction in the branch overall admin expenses by 25%. However, benefits: Itaú Unibanco says that network was motivated by the economic we expect this reduction would be operating income per virtual client is up cycle, we estimate that if in 10 years 50% partially offset by greater IT costs, to 40% higher than for traditional of the bank’s clients have moved to the including outsourcing, which would limit branch clients, likely a combination of virtual banking platform, the bank would the overall improvement to 15%-20%. higher revenues and lower expenses. be able to reduce its branch network by roughly 50%. We believe the ratio should be similar at other banks.

Source: Goldman Sachs Global Investment Research.

Information gains support better loan underwriting A virtual model is likely to give banks more touch points with clients, and as a result more information with which banks can make their loan underwriting decisions. For instance, at the moment Brazil essentially operates only a negative credit bureau (though a more robust model for the positive credit bureau is in the process of being approved in Congress), so information on borrowers is limited. Banks are forced to rely on statistical analyses of information provided by borrowers, which increases the chances of Type I and II errors. An online banking experience would generate significantly more data that banks can use to determine credit risk for retail borrowers, which when combined with the power of big data-like analysis could help banks grant loans to the right borrowers at the right time. Even if a more robust positive credit bureau were not in development, technology and big data could in part mimic its function. Academic research shows that positive credit bureaus, when replacing negative credit bureaus, increase the amount of lending and lower the cost of risk, which ultimately translates to lower spreads. The combination of these factors would have appositive impact on bank results.

Greater penetration of financials services: Skipping the branch A migration to digital banking would necessitate a change in the banking culture in Brazil, as well as in the way in which banks treat their clients. But at the same time it could serve to attract more clients to the financial system. Because branch banking is typically seen as a necessary inconvenience, particularly among younger clients, bypassing the branch and offering products and services directly to clients via mobile or web-based applications could increase their penetration and sales. It would be easier to unbundle services and products and as a result charge tailor-made fees, attracting parts of the population, particularly in the lower income segments, that currently are not a part of the financial system. While a substantial part of these new clients could be captured by fintechs, banks should also benefit from greater levels of financial activity and, to some degree, additional flow from clients.

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Interview with Itaú Unibanco

Livia Martines Chanes, Director of Digital Channels, User Experience and CRM Analytics Can you outline the bank’s current investments into technology, and in what areas they are focused? We are aware of the rapid changes the world is going through and we are further strengthening our digital focus to remain a constantly present and ideal bank considering each of our client’s profile. Our Internet banking is a comprehensive channel of fundamental services to our account holders since it was launched. In addition to the Internet channel, we have accelerated our investment in mobile applications, given their fast growth over the last four years, to also deliver the best of the bank through this channel. How successful has the bank’s push to digital banking been so far, both with regards to client acceptance and the bottom line? We already have 73% of our total transactions made through the internet and mobile channels. We are now working to improve the offerings of products that are less frequently used, but are still very important to offer a complete digital bank. In 2008, only 25% of transactions were made through digital channels. There is a strong change movement in our clients’ behavior, which relates to the fact that people are, regardless of age, more connected to the digital world, and the bank is moving forward at a fast pace toward a more digital offering. More than 6 million account holders are using our mobile app every month and the bottom line of our digital channel business has grown significantly in the last two years. Which current technologies (blockchain, etc.) or business models (fintechs, competitors, etc.) do you think have the most potential for disruption of the bank’s business and how is the bank working to counteract them? We see blockchain as an opportunity to promote the financial system’s evolution, with banks and regulators working together, focusing on increasing the safety and efficiency of banking transactions. Many see blockchain as a technology to reduce costs, but that is only part of its potential. Its great power is in transforming actual business models and the creation of new businesses through more collaborative models, with greater transparency, automation and trust. It should also be a catalyst for collaborative economics and to create autonomous organizations. We are alert to the innovation brought by fintechs and are following the evolution of User Experience and business models inside Itaú, integrating them into traditional features of banking. What role does the bank see for bank branches in the next 10 years? Our clients’ needs and the way they access the bank are changing, and we are always trying to understand the process and identify what makes the difference in their relationship with the bank, with service and solutions that are really perfect for each user. Evidently, the growth of digital imposes the necessity to upgrade the role of the branches in the client’s experience with the bank. We understand that the branch has an important role for a great part of our clients – as the main channel or additional to digital. Therefore, we will adjust the branches and our multi-channel experience to our new clients’ expectations, always aiming to deliver an integrated and impeccable experience.

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Our view of the outcome: A more efficient – and more diverse – financial sector As fintechs emerge, and banks adjust to compete, we expect the sector to transform from its current structure. In our view, the outcome will be a sector that is both more efficient and more diverse, both to the benefit of the consumer, but not necessarily to the detriment of existing players. Some key developments we expect will take place in the next 10 years are in Exhibit 38.

Exhibit 38: We see the financial sector becoming more diverse and efficient with the disruption caused by fintechs Main fintech-driven changes to Brazilian financial sector in next 10 years

Breaking barriers to entry Retail banks provide two separate sets of basic services: transactional branch banking and created by branches intermediation between savers and borrowers. Traditionally, branches gathered deposits and supported lending, creating a barrier to entry based on physical footprint. Technology is leading to an unbundling of the services provided by banks, allowing new entrants with a digital footprint to compete on relatively even terms. This means that, with more services and deposit taking being transferred online, branches should lose relevance over time, breaking down barriers to entry. As a result, we see fintechs (current and future) taking a share of the market, and we do not rule out established banks that still do not have a presence using this mechanism to enter.

Competition leading to The greater transparency and dispersion of information, should, in our view, lead to stronger lower spreads/prices competition amongst players and lower pricing for loans and services. Marketplaces for loans and savings products should reduce the information gap between lenders and borrowers. For example, a marketplace for loans, in which small lenders compete head-to-head with large lenders on rates, terms and other conditions should shift some power to the borrower, who will be armed with more information to make a decision. While credit risk will still be a limiting factor for the decline in spreads, we expect competition will nonetheless lead to some tightening.

Penetration into untapped Technology, as offered by fintechs and banks, will increase accessibility to financial products, markets allowing previously unbankable individuals to become potential clients. The potential clients range from those with little or no contact with the financials system (individuals in either the informal sector or in the low income strata) to those who are unaware of products because of the limitations of the current distribution system. New products that are economically unviable with the current distribution scheme could suddenly become interesting options. We see this as promoting more sustained growth in loans and financial services, and pushing overall levels of penetration (measured by loans to GDP or card spend per private consumption expenditure, for instance) to increase.

Changing habits of the bank Even though Brazilians are still heavy branch users, we believe that the development of new client technology that takes bank transactions online, combined with a growing penetration of smartphones and internet terminals, as well as the continued emergence of a generation more used to dealing with technology, should lead to a change in the habits of clients for financial services. This is in part visible through the fast adoption of mobile banking at Itaú Unibanco and Bradesco. Change in habits should lead to greater adoption, which ultimately should accelerate overall growth.

Source: Company data, Goldman Sachs Global Investment Research.

The end result, in our view, in the next 10 years fintechs will take a part of the market, but that market will grow faster because of the advent of fintechs that it would otherwise. Banks’ market share (based on assets, fees and other metrics) will decline, but we see it more as a result of slower growth compared to that of new entrants than outright loss. Banks should, though, suffer from pressure on lending margins and pricing for services, which we expect to be partially or completely offset by reduction in the branch network and other IT-driven gains. In other words, we expect the overall profits within the system to increase, reflecting largely the greater penetration of financial services, as well as the improved efficiency in their delivery. As a result, the financial system should become more diverse, more efficient and increasingly profitable.

That said, what we do not expect is for fintechs to completely displace the banks, or to drive pricing of loans and services to levels where profitability of the banks is significantly impaired. We also do not expect banks to remain idle as fintechs encroach on markets they

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find attractive – we see banks reacting and investments/strategy for IT to become an even more important topic for management and investors.

In the short term, however, we see changes as limited, given that fuller penetration of smartphones will still take some time and, more importantly, cultural attitudes towards changes in the provision of financial services are likely to be adopted slowly. Yet the innovative nature of solutions brought forth by fintechs is likely to buy them a relatively large share of mind, even if the share of wallet in the short term is still small.

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Risks: Regulation, reaction, growth

The emergence of fintechs in Brazil, and subsequent reaction by the banks, is subject to a series of risks. The most significant, in our view, comes from regulation, though we also see a negative reaction by incumbent banks and weak underlying economic activity that stifles innovation as concerns.

Regulation: Limiting growth and protecting the incumbent We see risks from regulation coming from two sources:

 Speed limits for growth: Playing catch-up. Because of the pace at which technology and innovation are advancing, regulation (coming almost entirely from the Central Bank) has consistently been playing catch-up. Historically, regulators have had difficulty in recognizing new trends and adjusting regulations to address new solutions. That said, entrepreneurs from fintechs and government regulators should both find common ground in creating a framework that will promote innovation that is helpful to clients.

Historically, the Central Bank’s main objective has been to preserve the integrity of the financial system. It has done this by enforcing capital adequacy and provisioning rules, as well as capital and regulatory-based barriers to entry. However, more recently, the Central Bank has shown growing interest in promoting competition and reducing spreads and transaction costs. For instance, regulation in the payments sector is forcing exclusive distribution agreements between acquirers and networks to be undone. Another example is the new rule to open bank accounts: as of August 2016, clients opening an account no longer need to go physically to a bank branch, but can open an account with an online signature (as long as banks comply with know-your- client rules).

That said, the pace of change and innovation, in Brazil and around the world, continues to be rapid. It is unclear whether the Central Bank will be able to keep up, and there could be potential markets that are rendered unsuitable because of an inappropriate regulatory framework. This could hamper the development of fintechs and slow the transition to a more competitive environment for all financial companies, including banks.

 Rebuffs that inadvertently protect incumbents. Fintech entrepreneurs say that the Central Bank has been receptive to conversation, and is showing growing awareness of the ongoing changes. However, the bank’s main outstanding goal still is to preserve the integrity and stability of the Brazilian financial system. By failing to identify how certain new developments would play out, and acting on the objectives of stability and integrity alone, the Central Bank could actually promote regulation that hurts existing and prospective fintechs. This regulation could be in the form of minimum capital levels, access limitations or requirements to reduce the advantage afforded by new technologies (such as requiring clients to go to a bank branch for certain transactions). While done in good spirit, such regulatory oversight could damage the ability of fintechs to thrive and could ultimately be negative for the market as a whole.

Even though we find the risk of such a development (i.e., poorly thought-out new regulations) more damaging than not promoting regulation that enables innovation, we think unfavorable new regulation would be much more damaging. Disruption finds ways around existing regulations, but can be killed by new regulations.

Negative reaction by incumbents: Not embracing change We believe that incumbents will react to the threat from fintechs by embracing disruption and similarly seeking out new ways to create value to clients. However, it is possible that

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banks attempt to block fintechs in other ways, such as denying access to information and undermining marketplaces, not to mention lobbying for regulations that block and slow the effects of new technology. An example is a lawsuit filed by Bradesco to keep GuiaBolso, a personal finance management website, from accessing client information. Nevertheless, with few exceptions, banks have embraced disruption, and have moved to improve their product offerings within the context of technological change.

Economic development and growth: Volatility and sluggishness Part of the incentive to develop new technologies and invest in new companies comes from the belief that economic growth, after three years of subpar performance, will normalize. If this growth does not return it could reduce the number of companies entering the market, as well as slow the pace of innovation in the country. Even though prospects for economic growth are generally improving, we believe much still is dependent on the implementation of structural reforms and the outcome of Brazil’s 2018 presidential elections. That said, we expect a negative turn is more likely to slow the emergence of fintechs rather than completely thwart it.

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Appendix: Fintech sector breakdown

Banking services

Estimated number of Scope of the The Brazilian banking market, particularly in retail banking, is highly fintechs: opportunity concentrated, with the top five banks holding over 84% of total loans. 10 Regulation and technology are enabling a virtual banking model, in which the importance of branch banking is significantly reduced. This model would break

down the current barriers to entry (largely distribution-based) and allow banks Estimated revenue pool in with advanced and user-friendly IT platforms to take share in both lending and 10 years: deposit-taking, as well as some fee-based services. Entrants starting to explore

this niche have been bolstered by a regulation issued in August 2016 that R$50 bn allows banks to open accounts without clients going to the physical branch to sign documents.

Estimated size of A 10% share of the Brazilian retail banking market total revenue pool (including revenue pool post-provision net interest income and fee revenues) in 10 years, which we believe is the target market for new entrants, would represent R$50 billion.

Exhibit 39: The entrants into the virtual banking market aim at taking clients out of the branch Examples of banking fintechs in Brazil; year of entry specified in each case

Company Business model Potential for disruption Other similar US comparables companies Banco Original Small traditional model wholesale bank Currently, the bank remains mostly Sofisa Direto, ING Direct, (2012, 2015 for that migrated to a full-service virtual corporate and agribusiness driven, but if Intermedium Moven, Bank retail operations) retail model (mobile and desktop), with the transition to virtual-based retail Purely deposits, loans, asset management, banking is successful, it will provide agricultural loans and corporate banking. evidence that having a large branch Operates only two branches, with all network is no longer a requirement for services being rendered online via app entry into the banking sector in Brazil. or webpage. Already a profitable This would further shake up the business business (though at a low ROE of 2%), models for banks in Brazil, and could with total loans of R$4.6 billion and lead to changes in strategies and, shareholders’ equity of R$2.2 billion. eventually, profitability levels for the Owned by the J&F Group. system. Banco Neon Basic mobile-based virtual banking, Basic mobile banking with no fees is a SDBank Simple, Bank (2015) taking deposits (with FDIC-like deposit significant departure from the current Mobile insurance), issuing credit and debit cards banking model employed by incumbents (Visa network), accepting payments and in Brazil. While the target market of transferring funds. There are no millennials is relatively contained, it maintenance fees, and transaction fees could expand with time to reach other are reduced. Targeting millennials, the clients. If sustainable, the model could bank has opened 5,000 initial accounts, lead to a significant reduction in the fee and target is to reach 100,000 active revenue streams for banks, potentially accounts by end of 2017. Funded by with a negative impact on profitability. angel and private equity investors. Zuum (2013) A joint venture between MasterCard and Provides an inexpensive, simplified Conta Um, E- LevelUp, Sail, mobile provider Vivo. Via a smartphone alternative to banks for bank dinheiro Lemon Wallet app, offers users accounts that can take transactions. While this effort is limited deposits (at banks and other to Vivo clients, could eventually be correspondents such as retailers), make extended to other mobile phone clients bill payments, obtain a debit card, and and limit growth opportunities for banks. withdraw money from ATMs. Can also transfer money to other users for no charge. As of year-end 2016, had over 600,000 clients.

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 34 May 12, 2017 Brazil: Financial Services

Payments

Estimated number of Scope of the The payments market in Brazil is one of the most developed in Latin America, fintechs: opportunity with card spend representing more than 30% of private consumption 70 expenditures compared to less than 20% for other countries. While money transfers and payments have always been efficient as a result of Brazil’s

history with hyperinflation, much of the payments industry is currently Estimated revenue pool in concentrated in the hands of few companies that are owned or sponsored by 10 years: large incumbent banks. The combination of regulatory change supporting

competition and technological developments (particularly smartphones and R$12 bn online commerce) has created an entry point for fintechs. Companies have

divided between B2C and B2B opportunities, with C2C not developing as quickly given the strength of the existing banking technology.

Estimated size of Based on the total amount of card spend (R$1 trillion in 2015), as well as the revenue pool amount of financial transfers in Brazil (1.5 billion transactions in 2015) and a market share of 20%, we estimate the total revenue pool to be R$10 billion in 10 years.

Exhibit 40: The main fintechs in payments target both consumers and companies Examples of payment-based fintechs in Brazil

Company Business model Potential for disruption Other similar US comparables companies Stone (launched A merchant acquirer sponsored by Has taken advantage of the changes in Paggcerto, Square, Braintree, in 2010) private equity that is not associated with regulation in merchant acquiring Pagpop, Mercado Ebanx, Worldpay incumbent retail banks. Provides encouraging competition, as well as IT Pago, Acqio, traditional merchant acquiring services systems that are in some ways superior SumUp, Payleven, with a state-of-the-art IT platform, as to those of incumbents. Currently has BelaViagem well as receivables discounting and 2.5% market share based on transaction other services to merchants. value, but targets 5% by 2020. Picpay (2013) End-to-end payment solution, with e- Can disintermediate the financial PagTag, Ewally, Venmo, Google wallet features. Allows cash transfers system’s robust money transfer systems, Mob2all, PayKey, Wallet, Popmoney, between users over a smartphone app and create parallel e-wallets that are E-dinheiro, PayU, Square cash via SMS, with connection to the user’s outside of the financial system, which Muxi, Zup, UniPay bank account or credit card. At the same would lower fees charged by banks on time, allows users to pay for goods at transfers. End-to-end solution could hurt merchants that have the system. Also similar solutions provided by banks. acts as a merchant acquirer for merchants. ValePresente A prepaid card issuer with end-to-end Prepaid card growth outpaced card Way up, ZenCard, Isis, Pex, Mango (launched in capabilities, from printing cards to market growth in the United States Todo Cartões, 2011) processing transactions (all within the through most of the last 10 years, and Meo Cartão, MasterCard network). Issues over the market in Brazil is still in its early Acesso, 500,000 cards per year and authorized years. Further penetration could PoupeCompre, more than R$1.5 billion in transactions in accelerate the shift from paper to plastic, Pismo the last 12 months. and change reward structures for merchants, service companies and banks. Tá Pago (2013) Mobile payment platform with Pure mobile payments (not associated PraPagar, Celcoin Paytm, PayU proprietary technology not associated with cards or financial institutions) in with any bank or telecom company, with Brazil have not enjoyed much success presence in food and transportation since they started being deployed six vouchers. Transaction is made through years ago, largely because acceptance at SMS, so smart phones are not the merchant level has been low. We see necessary. Focuses in the interior of the limited room for change in the near state of São Paulo; presently at 276 term, given the pace of technological merchants. change in other means of payment. Gerencianet Helps SMEs to bill clients in a wide array An efficient gateway that streamlines PagueVeloz, Hybris, BlueVine, (2007) of methods, including registered payments and obscures the MundiPagg, NowAccount invoices, checks, subscriptions, SMS, differentiating characteristics banks PayZen, AZPay, cards and other means. The company have, improving visibility on fees and Asaas, Koin, also creates marketplaces for online increasing competition. This could have Smartbill, Vindi, retailers. The system consolidates an impact on the cash management fees AceitaFacil, payments and streamlines cash that banks receive. Moneto management for the user. All services are provided online.

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 35 May 12, 2017 Brazil: Financial Services

Personal finance management

Estimated number of Scope of the Desktop-based personal finance management software like Quicken has not fintechs: opportunity flourished in Brazil, given the historical complexities of downloading financial 25 information. This means that Brazilians, even those in the more affluent income segments, have limited tools with which to monitor and manage their

income and spending. New tools being developed by fintechs give users the Estimated revenue pool in ability to track spending and indebtedness, and manage their financial 10 years: condition better than ever before. GuiaBolso says that new users reduce their

use of overdraft and revolving credit card loans by 25% within three months. R$6 bn Much like Credit Karma, the potential may ultimately lie in providing users with a marketplace in which smaller lenders can offer loans and, eventually, savings products. This would bypass the current bank-client relationship, and could drive down spreads for loans and funding.

Estimated size of Based on fee revenues for Brazilian banks (R$122 billion in 2016), excluding revenue pool asset management and card-related revenues, and a 10% market share.

Exhibit 41: Personal finance management fintechs add a layer between banks and clients Examples of personal finance management fintechs in Brazil

Company Business model Potential for disruption Other similar US comparables companies GuiaBolso (2012) A personal finance management app for Compiling information over the Organizze, Quanto Credit Karma, desktops and smartphones that tracks platforms of different banks reduces the Gastei, Poupa Mint, Moneysoft, user spending, income and indebtedness brand recognition that banks have with Certo, Meu Pocketbook from accounts in several banks and clients. Better management of accounts Dinheiro, Ghaio, financial institutions. Compiles that the service allows has helped users Mobills, information from users to create a reduce indebtedness, reducing interest Simplifica, Nibo “financial condition score” (proxy for a payments to banks. However, the most FICO score, given the absence of a potential for disruption comes from the positive credit bureau in Brazil). Offers a virtual marketplace for loans and marketplace for users to obtain loans investments. It would level the and make investments. Expanded to 3.1 distribution playing field for banks, million users by end of 2016 from allowing smaller banks to offer products 240,000 at the end of 2014. Funded by and compete on cost. While large banks the IFC, Kaszek Ventures, Ribbit Capital could still take a large share, the market and QED Investors. One of the most would become more efficient, leading to downloaded mobile apps in Brazil. lower returns. Quero Quitar Offers users an online platform to Could accelerate renegotiation of loans Kitado, Acordo Earn Up (2014) renegotiate loans with banks and other during an asset quality cycle, reducing Certo, PagoSim lenders/companies. Users include NPL ratios for banks and improving the borrowers with delinquent loans/ success of collections/recoveries. Could payments to be renegotiated, and inputs also provide a marketplace for clients to include the terms and conditions sought seek out other lenders to refinance loans to renegotiate. The renegotiation at a lower rate. process is driven by a proprietary algorithm that matches the demands of lenders with the capabilities of borrowers. Supported by Bradesco. Konkero (2012) Independent website that seeks to Limited financial education, particularly EduCity Wallet Hub, Credit inform and educate users on personal given the complexity of the Brazilian Sesame finances through articles and interviews. financial system, has hurt financial Also compares pricing on loans, system clients, limited growth and led to deposits, fees, insurance and other larger cycles. Lack of information has financial products, allowing users to click historically benefitted incumbents, as through to apply for the products. clients were not aware of alternative Revenue comes from ads and sponsored service providers or differences in links. pricing.

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 36 May 12, 2017 Brazil: Financial Services

Lending

Estimated number of Scope of the As of December 2016, large incumbent retail banks in Brazil concentrate 83% of fintechs: opportunity all consumer loans, including 81% in credit card loans, 79% in payroll loans 20 and 98% in mortgages, as well as 70% of loans to SMEs. Because of subscale distribution capabilities and limited information on borrowers (no positive

credit bureau), small lenders have traditionally struggled to gain share. New Estimated revenue pool in technologies (largely smartphone-based) and greater acceptance of alternative 10 years: distribution methods (internet and correspondent banking) have allowed

smaller lenders to expand activities. This could be further strengthened by new R$22 bn rules bolstering the credit bureau and providing incentive to competition. The

government’s commitment to lowering lending spreads would seem to us to play into the strengths of fintechs, which use technology and segmentation to target borrowers and drive growth.

Estimated size of Based on the penetration of personal and SME loans in Brazil compared to revenue pool global peers, we estimate a total revenue pool (net interest income post provision) in 10 years of R$22 billion.

Exhibit 42: High spreads create an opportunity for fintechs in lending Examples of lending-based fintechs in Brazil

Company Business model Potential for disruption Other similar US comparables companies NuBank (2013) No-fee stand-alone credit card company Digital-only interaction with clients is Trigg, Digio Affirm, My Swipe (MasterCard network), targeting different and easy to use, and can create Card, Loop Pay, millennials and young professionals. stickiness. Data-based credit scoring Klarna Applications are accepted only by model appears to be more precise than referral, and all interactions with users the one used by traditional banks, are made through a proprietary granting users access to credit at lower smartphone app. Credit scoring is based rates. Offers to clients an alternative to on financial and behavioral metrics. The banks, which have a poor reputation company has received over 9 million especially amongst millennials. While applications for cards. Funded by lending is still in the early stages, it Sequoia Capital, Kaszek Ventures, Tiger should provide an alternative to banks. Global Management and Founders Fund. See our case study on page 25. Geru (2013) An online platform in which borrowers Disintermediates the banking process, Credisfera, Lending Club, can take loans (up to US$10,000) at providing a direct link between borrower Creditas, Biva, Sofi, Activehours, lower rates than overdraft/credit card and saver. With the emergence of virtual Portfy, Finanzero, Credible, lines offered by banks. The loans are financial marketplaces, distribution Avante, Simplic, CommonBond, made by a partner bank, which then becomes less of a challenge. Even if Lendico Lendkey, repackages the risk as receivables funds incumbents do not lose significant share, LendingTree that are then sold to investors/ savers. this should with time apply pressure on Scoring of credit risk is done through spreads and improve penetration of proprietary mechanisms, in addition to loans. data from credit bureaus, and cash is disbursed in up to 10 days. Nexoos (2014) A platform that acts as a bridge between By providing a direct link between SME Credito Samba, Square Capital, SMEs that need credit and individuals borrower and saver, the business model BizBank, Capta iZettle, Lendio, that want to invest. It originates loan disintermediates banks. Distribution still Money, Intoo Fundbox, Fundera demand from SMEs in several sectors, limits penetration, but further adoption credit scores these SMEs and offers of digital banking by SMEs should level individual investors the opportunity to the playing field and allow for stronger provide parts of the loans. The loan is growth in borrowers. ultimately provided by a partner bank, which then issues a time deposit for the investor that is linked to the loan.

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 37 May 12, 2017 Brazil: Financial Services

Investments, savings, wealth management, trading

Estimated number of Scope of the Saving in Brazil has historically been constrained to the upper income social fintechs: opportunity strata, which usually are the only ones with disposable income available to 15 save. Even so, much of the saving has been driven by bank relationships, with limited individual investing or non-bank saving. In part, this was a result of the

high level of real interest rates offered by government securities over most of Estimated revenue pool in the last 20 years, which limited risk taking by savers and crowded out 10 years: alternative investment types. With interest rates coming down and the level of financial education increasing, a change to this situation is underway. R$10 bn Platforms that provide savers with a user-friendly way to compare investment options and deploy funds seamlessly could start to draw savers away from traditional banks. While more complex modes of investment, such as equity and other structured products, will likely still take time to develop, we see growth coming from alternative distribution platforms, which should impinge on current market share held by the banks and lead to tighter funding spreads.

Estimated size of Based on the AUM for the Brazilian asset management industry excluding revenue pool banks (R$880 billion in 2016), as well as equity trading volumes for individuals (R$360 billion in 2016), and a 20% market share, we estimate total revenue pool in 10 years of R$10 billion.

Exhibit 43: Investment and wealth management fintechs add more options for clients Examples of investment and wealth management fintechs in Brazil

Company Business model Potential for disruption Other similar US comparables companies Magnetis (2012) A robo-advisor (both mobile and Passive investing in Brazil typically Verios, SmarttBot, Betterment, desktop-based) that takes the user’s entails investing in fixed income funds Warren, Alkanza Wealthfront, investment goals and risk appetite to sold by banks, which are statically Ellevest build a tailor-made portfolio of allocated and charge high management investments in fixed income, equity and fees. Dynamic allocation via algorithms FX. Charges a flat fee of 0.4%, in addition is an important selling point, but we see to transaction and depositary fees. more disruption in the low fees charged Investments are made through a partner by the company relative to comparable brokerage firm. Funded by Redpoint and products. Monashees. Órama (2011) Full-scale online broker that allows users Information on investment funds, while Easynvest, Yubb, Envestnet, to compare fees, performance/yields and available on regulatory websites or with Renda Fixa Personal Capital terms for investment funds (active and the management company, is not easy passive, equity and fixed income), bank to sort or understand for unsophisticated time deposits and other investment investors. In particular, comparability of products offered by the company, small fees and past performance could lead to banks and third-party asset managers. fee compression and greater Investments are made through the competition with an industry still company’s platform. dominated by large banks. SmartBrain Offers an online platform to manage Allows users to disengage from Meus Fundrise (2009) investments in equity, fixed income and traditional brokers to manage Ynvestimentos, bank deposits. Users can sort through investment portfolio. Given the limited controlAção, their portfolios based on several metrics, amount of active investors in Brazil, the LiveCapital and simulate trades. Charges a flat scope for disruption is small until the monthly fee based on the type of asset market expands. being monitored. Investeapp Allows users to invest in government While limited in scope, the securities Motif Investing (2015) securities via the Tesouro Direto available for investment in the Tesouro framework through a mobile app. Direto framework offer better returns Investments are made through a partner than those offered by traditional bank brokerage firm. savings products. An easy way to invest in those securities could disintermediate the banks.

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 38 May 12, 2017 Brazil: Financial Services

Insurance

Estimated number of Scope of the Insurance has traditionally been an underpenetrated market in Brazil, in part as fintechs: opportunity a result of the relatively high levels of interest rates faced in the country that 15 basically keeps out several life insurance/annuity products. Another challenge has been regulation, which requires the use of brokers to sell products, thus

limiting options for direct sales. Sustainably lower benchmark rates could Estimated revenue pool in eventually lead to greater demand for life products, which would, we believe, 10 years: to some disruption of the current distribution model dominate by

bancassurance. In the meantime, most opportunities will lie in disrupting the R$25 bn current brokerage model by pushing it online and promoting greater

transparency (thus leading to more competitive pricing by insurance companies) or providing differentiated products (like pay for use) with pricing based on big data or other technology-intensive processes. While the initial impact could be limited, in the long term we see the potential for much disruption – particularly if benchmark rates decline further.

Estimated size of Based on total earned premiums (excluding complementary pension and revenue pool premium bonds, but including health) in the insurance sector (R$240 billion in 2015) and a market share of 5%, we estimate a total revenue pool of R$25 billion in 10 years.

Exhibit 44: Insurance fintechs for now focus more on delivery/brokerage than underwriting Examples of insurance fintechs in Brazil

Company Business model Potential for disruption Other similar US comparables companies Bidu (2011) An online insurance broker employing Distribution of insurance is one of the Genial Seguros, PolicyGenius, proprietary technology that allows users main barriers to entry for the Brazilian Segurar.com, Everquote, to quickly and simply compare offers market. Another barrier is the limited Smartia, Minuto Onsurance, from major insurance companies in availability of information for insurance Seguros, Sossego Insurify Brazil, and then seamlessly sign up for buyers to compare offers by insurance Seguros, VisionX coverage. The company currently companies. A platform that allows operates only with auto, residential and seamless comparison could lead to travel insurance. Funded by Amadeus greater competition and lower pricing, Capital, Monashees Capital, Bertelsmann as well as to greater penetration of and Otto Capital Partners. insurance products. Thinkseg (2016) A digital insurance company focusing, at More so than the distribution strategy, Youse Cuvva, Esurance, first, on auto insurance. Potential clients which in and of itself is innovative, the Metromile need to be invited by selected brokers to most potential for disruption comes join, and all interactions are made from the model of insurance sold (price through a proprietary smartphone app. per use is uncommon in Brazil) and the The company employs a “pay for use” use of innovative concepts to underwrite concept and uses a data-driven risk. While the outcome is still unclear, if underwriting mechanism based in part successful it could lead to a change in on each client’s digital footprint. how insurance companies in Brazil Launched by a former BTG Pactual approach pricing products, potentially partner. leading to further market penetration.

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 39 May 12, 2017 Brazil: Financial Services

Venture Capital Horizons Inside: Brazil fintech

Developments in venture capital are an increasingly important part of the investment process, regardless of the investor or investment. As new technologies, business models, and capital structures are developed, venture’s share of public market funds and corporate capital grows, resulting in disruption of existing industries and companies and the creation of new opportunities. Through our Venture Capital Horizons (VCH) series, we attempt to monitor venture capital broadly, as well as focus on specific areas of investment that our industry analysts believe are important within the context of the greater investment landscape. In this VCH Inside, we focus on private equity and venture investment in Brazil Fintech.

Exhibit 45: Investment in fintech companies in Brazil has accelerated over the last three years Metrics for VC investments in fintech in Brazil

200 20 180 18 160 16 140 14 120 12 100 10 80 8 60 6 40 4 20 2 0 0 2012 2013 2014 2015 2016

US$ million invested (LHS) # of deals (RHS)

Source: CB Insights, Goldman Sachs Global Investment Research.

Top investors in the last five years by deal participation count include Kaszek Ventures (11), Redpoint e.ventures (10), Monashees Capital (7), QED Investors (6), Ribbit Capital (6), Sequoia Capital (5), and Tiger Global Management (4).

Exhibit 46 shows the fintechs that received venture capital funding since 2013. The company that received the most funding, both in total amount and in number of rounds, was NuBank, which also is one of the standard bearers for the industry in Brazil and also the most developed. In terms of mix by number of deals, financial management companies (GuiaBolso, ContaAzul) have received multiple rounds, but lending businesses (Creditas) have also stood out.

Goldman Sachs Global Investment Research 40 May 12, 2017 Brazil: Financial Services

Exhibit 46: Venture capital has funded a broad spectrum of Brazilian fintech, headlined by Nubank Top 25 Brazilian fintech venture capital deals, US$ million

Latest Total Funding Company Round Date City Funding ($mn) ($mn)

Nubank Series D 7-Dec-16 $80 $235 Sao Paulo Nubank Series C 7-Jan-16 $52 $235 Sao Paulo Nubank Series B 2-Jun-15 $30 $235 Sao Paulo Creditas Series B 20-Feb-17 $19 $27 Sao Paulo GuiaBolso Series C 11-May-16 $17 $24 Sao Paulo Nubank Series A 26-Sep-14 $14 $235 Sao Paulo ContaAzul Series C 20-Dec-14 $9 $19 Santa Catarina GuiaBolso Series B 21-Aug-15 $7 $24 Sao Paulo RecargaPay Series A 17-Jun-08 $7 $9 Sao Paulo MUXI Series A 17-Apr-17 $5 $5 Rio de Janeiro Creditas Series A - II 10-Jun-16 $4 $27 Sao Paulo ContaAzul Series B 4-Nov-13 $3 $19 Santa Catarina Creditas Series A 3-Aug-15 $3 $27 Sao Paulo ContaAzul Series A 8-Jan-13 $3 $19 Santa Catarina Moneto Seed VC 8-Dec-15 $3 $3 Sao Paulo ContaBilizei Series A 9-Jun-16 $2 $2 Curitiba Pagus PoupeCompre Pre-Seed 1-Dec-16 $2 NA Sao Paulo Nubank Seed VC 19-Jul-13 $2 $235 Sao Paulo Meus Pedidos Software Seed VC 15-Apr-15 $2 $2 Joinville FinanZero Unatt. VC 24-Mar-16 $1 $1 Sao Paulo BizBank Seed VC 25-Oct-16 $1 $1 Rio de Janeiro BizCapital Seed VC Unknown $1 Unknown Rio de Janeiro aSaaS Seed VC - II 30-Jan-17 $1 $2 Joinville Pismo Seed VC 30-Nov-16 $1 $1 Sao Paulo Moneto Seed VC - II 6-Oct-16 $1 $3 Sao Paulo

Source: CB Insights, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 41 May 12, 2017 Brazil: Financial Services

Rating, pricing and price target information

Exhibit 47: Rating and price target information for covered Brazilian banks discussed in this report Currency as indicated

TICKER RATING 12-MONTH METHODOLOGY KEY RISKS PRICE TARGET Brazilian banks Itaú Unibanco Holding (R$/sh) ITUB4.SA Neutral 41.60 DDM Asset quality rebound, stronger margins, regulation, and competition. Itaú Unibanco Holding (US$/sh) ITUB Neutral 13.20 DDM Asset quality rebound, stronger margins, regulation, and competition. Taxation, regulation, performance of Itaú Unibanco, weaker‐than‐expected macro trends, sizable Itaúsa (R$/sh) ITSA4.SA Buy 12.00 Sum of the parts diversification, and M&A BTG Pactual Group (R$/sh) BBTG11.SA Neutral 19.70 Sum of the parts Volatility, competition, regulation, and dependence on key executives. Different‐than‐expected economic growth in Brazil, benchmark interest rate cuts, integration of HSBC Brasil, Banco Bradesco (R$/sh) BBDC4.SA Neutral 32.00 DDM and regulation changes. Different‐than‐expected economic growth in Brazil, benchmark interest rate cuts, integration of HSBC Brasil, Banco Bradesco (US$/sh) BBD Neutral 10.18 DDM and regulation changes. Conflicts of interest with controlling shareholder, regulation, competition, and different‐than‐expected Banco do Brasil (R$/sh) BBAS3.SA Neutral 34.60 DDM economic growth. Stronger‐than‐expected economic growth, higher fee income mainly from merchant acquiring business Banco Santander Brasil (R$/sh) SANB11.SA Sell 21.60 DDM (GetNet), higher gross loan growth, improved efficiency, and cost control. Stronger‐than‐expected economic growth, higher fee income mainly from merchant acquiring business Banco Santander Brasil (US$/sh) BSBR Sell 6.80 DDM (GetNet), higher gross loan growth, improved efficiency, and cost control.

Source: Goldman Sachs Global Investment Research

Rating and pricing information Banco Bradesco (N/N, $10.04), Banco Bradesco (N/N, R$31.63), Banco do Brasil (N/N, R$34.39), Banco Santander Brasil (S/N, $8.72), Banco Santander Brasil (S/N, R$27.65), BTG Pactual Group (N/N, R$19.15), Itaú Unibanco Holding (N/N, $12.57), Itaú Unibanco Holding (N/N, R$39.75) and Itaúsa (B/N, R$10.27).

Goldman Sachs Global Investment Research 42 May 12, 2017 Brazil: Financial Services

Disclosure Appendix Reg AC We, Carlos G. Macedo, Marcelo Cintra, Steven Goncalves and Nelson Catala, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

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Goldman Sachs Global Investment Research 43 May 12, 2017 Brazil: Financial Services

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Goldman Sachs Global Investment Research 44 May 12, 2017 Brazil: Financial Services

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